Business Cycle and Corruption
Omer Gokcekus, Yui Suzuki John C. Whitehead School of Diplomacy and International Relations Seton Hall University USA
EOC 2010, October 9-14, 2010, Passau, Germany
Introduction - Permanent income and corruption
z the higher the income level, the lower the corruption (e.g., La Porta et al, 1999; Mauro, 1995; Shleifer and Vishny, 1993; Treisman, 2000) - Transitory income and corruption z ???
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Transitory income and corruption Galbraith ( The Great Crash 1929, p.133) "At any given time there exists an inventory of undiscovered embezzlement in — or more precisely not in — the country's businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks."
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Model (a la Mélitz and Zumer (2002) CORRUPTi,t
β0
β1 INCOMEi
β2 INCOMEi,t
INCOMEi
εi,t ,
(1)
where CORRUPTi,t = (CORRUPTi/CORRUPTAVE)t,; INCOMEi,t = (GDPi/GDPAVE)t, INCOMEi , (average income) reflects the level of permanent income at country i relative to other countries in the sample, INCOMEi,t
INCOMEi , (deviation from the average income) reflects transitory income Gokcekus & Suzuki, EOC 2010
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Model (a’ la Mélitz and Zumer (2002) … Equation 1 can be decomposed into the following two parts: CORRUPTi
β0
β1 INCOMEi
CORRUPTi,t
CORRUPTi
ηi
(2)
β2 INCOMEi,t
INCOMEi
μi,t ,
(3)
Also, Equation (3) could be re-formulated as: CORRUPTi,t
CORRUPTi
∑Lj 0 β2,t
j
INCOMEi,t
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j
INCOMEi
i,t ,
(4)
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Estimation Results Equation (2) (2) (3)
Column (1) Independent Variable (Coefficient)
OLS
IV (2SLS)
Constant β0
0.56*** (0.06) 0.44*** (0.05)
0.45*** (0.09) 0.55*** (0.08)
Permanent income β1 Transitory income (β2 )
Equation (3) (4) (5) OLS
GMM-IV
GMM-IV
-0.15*** (0.06)
-0.10** (0.05)
-0.09 -0.05
Transitory income (β2,t ) Transitory income (β2,t Number of observations Adjusted R2 Degrees of freedom
Equation (4) (6)
(0.10) 1
-0.04
)
(0.11) 39
39
507
0.66
0.62
0.01
37
37
506
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507
21
43
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Concluding Remarks Main finding: Corruption expands in good times and shrinks in bad times.
Policy implication: In good times regulators need to pro-actively take precautionary measures and apply meticulous audits.
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